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INDIA is poised to narrow the gap with China in MSCI’s gauge for developing nations.
Analysts from firms including Smartkarma and IIFL Securities expect India’s weight in the MSCI Emerging Markets Index to rise by at least one percentage point following the index provider’s review this week. This would bring the country almost on par with China, which currently accounts for 22.33 per cent of the benchmark. India lags at 19.99 per cent.
A higher weighting for India will position it to become the new anchor for emerging market (EM) equities, likely driving increased flows into the country. Fund managers say that India’s rising heft may make the EM gauge more appealing to global investors who have been wary due to China’s sway over the index.
“It can make the EM index more balanced, where secular growth stories such as India receive higher allocation” compared with more cyclical markets such as China and Korea, said Vivek Dhawan, portfolio manager at Candriam Belgian.
This shift has a side effect: index followers may be forced to allocate funds to India’s already-expensive stocks at a time when crowded trades are taking a hit due to the turmoil in global markets.
India – long touted as the “next China” – has emerged as a favourite among investors, driven by its robust economic growth, a growing middle class and burgeoning manufacturing sector. Meanwhile, China is dealing with long-term economic challenges and increasingly strained relations with the West.
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“Many global investors who didn’t look at India as a standalone allocation in the past would now look at it more favourably,” said Hiren Dasani, co-head of Emerging Markets Equity and lead portfolio manager of India Equity strategies at Goldman Sachs Asset Management.
China’s standing in emerging markets has shrunk in the past few years, while India’s has steadily expanded. At its peak in 2020, China accounted for 40 per cent of the MSCI EM Index, but that weighting has dropped amid Beijing’s regulatory crackdowns and efforts to deleverage its indebted property sector.
As at end of July, India’s weight was just 2.34 percentage points away from China’s in the MSCI Asia-Pacific Index, a regional benchmark, a recurring pattern across most gauges from major index providers. MSCI did not respond to an e-mail seeking comment outside of regular business hours.
“With a rising equity market, increase in free float for companies and new large listings in India, the gap in the weightings should continue to narrow heading into year-end,” said Brian Freitas, an analyst at Smartkarma.
In its review, MSCI is likely to add six stocks, including Samsung Electronics supplier Dixon Technologies (India) and property developer Oberoi Realty, according to Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research Analysis. HDFC Bank, India’s largest by market value, may also see a gradual increase in its weighting, he wrote.
While Chinese stocks have struggled, India’s NSE Nifty 50 Index has risen 12 per cent this year, following Prime Minister Narendra Modi’s third consecutive term in office. The benchmark gauge is set for a ninth straight year of annual gains.
The contrasting trajectories highlight investors’ preference for India even as China’s equities remain very cheap. It also underscores Beijing’s inability to stem the downtrend in its markets.
“We do look at India as a bit of a diversifier against some of China’s weakness,” said Seema Shah, chief global strategist at Principal Asset Management. “A lot of the potential that people have been speaking about for years and years is now looking to be fulfilled.” BLOOMBERG
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